RIGHT FROM THE START
GUIDELINES FOR NOT-FOR-PROFIT BOARD MEMBERS
Attorney General ELIOT SPITZER Charities Bureau 120 Broadway New York, NY 10271
(212) 416-8400 http://www.oag.state.ny.us/charities/not_for_profit_booklet.pdf
Dear Board Member:
This booklet is to help you, a current or prospective nonprofit board member, understand your rights and responsibilities during your service to a not-for-profit corporation. While charitable organizations in New York State vary greatly in size and purpose, the law imposes on all board members the same responsibilities.
Please read this booklet carefully and thoughtfully. Follow up on questions raised in your reading and seek legal advice for the answers whenever necessary. This booklet is not a substitute for legal advice from an attorney but is intended to help you identify critical issues you may encounter as you fulfill your role as a board member.
Many legal and financial problems of a not-for-profit corporation stem from board members who were unaware of their rights and responsibilities or did not diligently pursue them. All board members exercise their duties with two overriding responsibilities: to insure that (1) the charitable purposes of the organization are carried out and (2) none of its assets are wasted or diverted for private benefit. A failure to meet these obligations can result in financial or other liability for the board member.
By making this effort, I believe you will find your service on the board to be more enjoyable, more productive and more free of anxiety.
People like you who serve on not-for-profit boards make real differences in the lives of so many New Yorkers. It is my hope that in some small way this booklet can help you continue your important work.
Sincerely,
ELIOT SPITZER WHO MAY JOIN A BOARD?
Board members come from all backgrounds, bringing diverse talents to the organizations they serve. Anyone over eighteen is legally qualified to serve on a board.
BEFORE BECOMING A BOARD MEMBER IN NEW YORK
We suggest that you do the following to learn about an organization before you join its board:
Read the organization's certificate of incorporation, by-laws and board minutes for the last year to learn about its purposes, activities and problems.
Review the organization's audited financial statement for the last year and its current financial report to see how the organization spends its money and to evaluate its economic health.
Learn about the organization's programs - read its publications, visit its program sites.
Talk to current and former board members to learn about what the board does and why the former board members left the board.
Find out from the board chair and the organization's executive director what is expected of you as a board member.
Find out whether the organization is required to register with the Attorney General's Charities Bureau and whether it has registered and filed all required reports.
Be sure that you can give the time expected of a board member. Your colleagues should respect your decision to decline an invitation to join a board because you are "over-extended." Joining a board without sufficient time to devote to its business is often the root of the troubles faced by many board members.
DUTIES OF BOARD MEMBERS
While the board is not usually involved in the day-to-day activities of the organization, it is responsible for managing the organization and must make decisions crucial to the life and direction of the organization, such as adding or removing board members, hiring and firing key employees, engaging the auditors and authorizing financial transactions. In carrying out those responsibilities, members of a board of directors must fulfill fiduciary duties to the organization and the public it serves. Those duties are commonly referred to as the duties of care, loyalty and obedience. They are primary.
Duty of Care
Under the duty of care, a director must be familiar with the organization's finances and activities and participate regularly in its governance. In carrying out this duty, directors must act in "good faith" using the "degree of diligence, care and skill" which prudent people would use in similar positions and under similar circumstances.
In exercising the duty of care, responsible board members should, among other things, do the following:
Attend board and committee meetings and actively participate in discussions and decision making.
Read the minutes of meetings and all reports, including financial statements and reports by employees.
Read any literature produced as part of the organization's programs.
Insure that the organization has proper written internal financial controls and written policies to safeguard, promote and protect the organization's funds and other assets and obtain an employees, officers and directors fidelity bond to protect the organization from embezzlement. Engage in careful oversight of the organization's finances. The Chief Executive or Financial Officer should report at every board meeting. The report should include an income and expense statement compared to the prior month, budget and year-to-date activities.
Encourage diversity among board members. Diversity will help insure a board committed to serve the organization's mission with a range of appropriate skills and interests.
Be involved in the selection of the organization's Chief Executive Officer, Chief Financial Officer and other key employees responsible for the day-to-day activities of the organization. The board is responsible for such individuals having the appropriate education, skills, and experience to assume a key position and for their doing a good job.
Duty of Loyalty
Directors are charged with the duty to act in the interest of the corporation. This duty of loyalty requires that any conflict of interest, real or possible, always be disclosed in advance of joining a board. Board members must avoid transactions in which they or their family members benefit personally, and if such transactions are unavoidable, disclose them fully and completely to the board.
In order to exercise this duty of loyalty directors must be careful to examine transactions that involve board members or members of their families. The board must not approve any transaction that is not fair and reasonable to the corporation, and the conflicted board member may not participate in the board vote.
The board should have a written "conflicts of interest" policy so that all members are aware of the type of transactions that may prohibit them from joining the board. Some such policies prohibit board members from engaging in any transaction that may result in even the appearance of a conflict of interest.
No matter how well-off the corporation may be, board members may not borrow money from the corporation. Such loans are absolutely forbidden by New York law, even if there is a promise to repay the money borrowed with interest.
Duty to Carry out the Corporation's Mission and Comply with the Law
A board has a duty of obedience to insure that the corporation complies with all appropriate laws, including:
Dedicating the organization's resources to its mission.
Insuring that the corporation carries out its purposes and does not engage in unauthorized activities.
The board also has the duty to comply with all appropriate laws, including -
Registering with the Attorney General's Charities Bureau in New York State.
Complying with registration and reporting laws and other applicable laws of all states in which it conducts activities and\or solicits contributions.
Filing of required financial reports with the Attorney General, the State Worker's Compensation Board, the State Department of Taxation and Finance and the Internal Revenue Service.
Paying all taxes such as Social Security, income tax withholding (federal, state and local) and any unrelated business income tax. Board members may be personally liable for failing to pay withholding taxes on employees' wages.
Providing copies of its federal reports (990, 990PF, 990EZ) to members of the public who request it.
Maintaining complete and accurate records.
Maintaining complete and accurate books and records, including minutes of board and committee meetings and books of account. Complying with all provisions of the Internal Revenue Code, including those that govern compensation and self-dealing so as not to subject the organization, the board or the officers to federal excise taxes.
INFORMATION AVAILABLE TO YOU AS A BOARD MEMBER
As a board member, you need access to information necessary to carry out your responsibilities. You have an absolute right to:
Review the books and records of the organization.
Receive copies of board minutes as well as financial and other reports.
Receive notice of all board meetings unless the time and place of the regular meetings are set forth in the by-laws.
KEEP YOUR EYES ON THE ASSETS
Board members are responsible for overseeing the assets of the organization and insuring that funds are expended only to promote the corporate mission. In order to insure that the assets are properly managed the board should, often with professional guidance, do at least the following:
Have an annual budget.
Review internal financial controls and annual financial statements with independent auditors.
Make sure that restricted gifts are used only for the purposes for which they were donated.
Require and review monthly financial reports from the employees charged with day-to-day operations of the organization.
Seek legal and financial advice whenever you feel uneasy.
Secure fidelity insurance against embezzlement. It is inexpensive and a good idea.
IF YOU ARE SUED
Board members may be sued in their personal capacity by an individual or entity with a claim against the corporation. That means your personal assets may be at risk for action taken while a board member. New York State law provides for indemnification of board members in certain circumstances. In order to encourage people to serve on boards while protecting them from claims, many charitable organizations purchase liability insurance for directors and officers. As a board member, you should determine whether your organization has such insurance and understand what it covers and what it does not cover.
SOURCES OF HELP
This booklet was prepared by the Attorney General's Charities Bureau to give board members and prospective board members basic information concerning their rights and responsibilities. It is not intended to answer all questions nor provide all the information needed to avoid liability.
Your role as a board member is extremely important. In the life of every board, there are times to seek help. New York is home to many organizations that provide assistance to not-for-profit corporations and their boards. The Internet provides access to countless web sites providing assistance to not-for-profits. Please use the wide range of information available to you. You can receive information about registration by contacting Attorney General's Charities Bureau at (212) 416-8400.11
You can also find us at the Attorney General's web site -
http://www.oag.state.ny.us/charities/charities.html
Our web site contains information and forms concerning registration requirements applicable to your organization and resources to assist you.
ATTORNEY GENERAL'S CHARITIES BUREAU 120 BROADWAY NEW YORK, NY 10271 (212) 416-8400 September 2000
REGIONAL OFFICES OF THE ATTORNEY GENERAL
Albany Nassau Suffolk State Capitol 200 Old Country Road 300 Motor Parkway Albany, NY 12224-0341 Mineola, NY 11501-4241 Hauppauge, NY 11788-5127 (518) 474-7330 (516) 248-3300 (631) 231-2400
Binghamton New York City Syracuse 44 Hawley Street - 17th Floor 120 Broadway 615 Erie Boulevard West - Binghamton, NY 13901 New York, NY 10271 Suite 102 (607) 721-8778 (212) 416-8000 Syracuse, NY 13210-2339 (315) 448-4800
Brooklyn Plattsburgh Utica 55 Hanson Place, Suite 752 70 Clinton Street 207 Genesee St. --Rm 504 Brooklyn, NY 11217 Plattsburgh, NY 12901-2818 Utica, NY 13501-2812 (718)722-3949 (518) 562-3282 (315) 793-2225
Buffalo Poughkeepsie Watertown Statler Towers 235 Main Street - 3rd Floor 317 Washington Street 7 Delaware Avenue Poughkeepsie, NY 12601 Watertown, NY 13601-3744 Buffalo, NY 14202-3473 (914) 485-3900 (315) 785-2444 (716) 853-8400
Harlem Rochester Westchester 163 West 125th Street 144 Exchange Boulevard 101 East Post Road New York, NY 10027-8201 Rochester, NY 14614 White Plains, NY 10601- (212) 961-4475 (716) 546-7430 5008 (914) 422-8755
Attorney General's Complaint Number: 1-800-771-7755 (Voice) 1-800-788-9898 (TTY) Visit our Website at: http://www.oag.state.ny.us
1 The Charities Bureau publishes booklets on various not-for-profit transactions such as the formation of a corporation, sales of substantial assets and dissolution. This and all Attorney General publications are available free of charge.